News implied volatility and disaster concerns

Asaf Manela; Alan Moreira

doi:10.1016/j.jfineco.2016.01.032

News implied volatility and disaster concerns

Asaf Manela
, Alan Moreira

Research output: Contribution to journal › Article › peer-review

364 Scopus citations

Abstract

We construct a text-based measure of uncertainty starting in 1890 using front-page articles of the Wall Street Journal. News implied volatility (NVIX) peaks during stock market crashes, times of policy-related uncertainty, world wars, and financial crises. In US postwar data, periods when NVIX is high are followed by periods of above average stock returns, even after controlling for contemporaneous and forward-looking measures of stock market volatility. News coverage related to wars and government policy explains most of the time variation in risk premia our measure identifies. Over the longer 1890–2009 sample that includes the Great Depression and two world wars, high NVIX predicts high future returns in normal times and rises just before transitions into economic disasters. The evidence is consistent with recent theories emphasizing time variation in rare disaster risk as a source of aggregate asset prices fluctuations.

Original language	English
Pages (from-to)	137-162
Number of pages	26
Journal	Journal of Financial Economics
Volume	123
Issue number	1
DOIs	https://doi.org/10.1016/j.jfineco.2016.01.032
State	Published - Jan 1 2017

Keywords

Equity premium
Implied volatility
Machine learning
Rare disasters
Return predictability
Text-based analysis

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10.1016/j.jfineco.2016.01.032

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abstract = "We construct a text-based measure of uncertainty starting in 1890 using front-page articles of the Wall Street Journal. News implied volatility (NVIX) peaks during stock market crashes, times of policy-related uncertainty, world wars, and financial crises. In US postwar data, periods when NVIX is high are followed by periods of above average stock returns, even after controlling for contemporaneous and forward-looking measures of stock market volatility. News coverage related to wars and government policy explains most of the time variation in risk premia our measure identifies. Over the longer 1890–2009 sample that includes the Great Depression and two world wars, high NVIX predicts high future returns in normal times and rises just before transitions into economic disasters. The evidence is consistent with recent theories emphasizing time variation in rare disaster risk as a source of aggregate asset prices fluctuations.",

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AB - We construct a text-based measure of uncertainty starting in 1890 using front-page articles of the Wall Street Journal. News implied volatility (NVIX) peaks during stock market crashes, times of policy-related uncertainty, world wars, and financial crises. In US postwar data, periods when NVIX is high are followed by periods of above average stock returns, even after controlling for contemporaneous and forward-looking measures of stock market volatility. News coverage related to wars and government policy explains most of the time variation in risk premia our measure identifies. Over the longer 1890–2009 sample that includes the Great Depression and two world wars, high NVIX predicts high future returns in normal times and rises just before transitions into economic disasters. The evidence is consistent with recent theories emphasizing time variation in rare disaster risk as a source of aggregate asset prices fluctuations.

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KW - Implied volatility

KW - Machine learning

KW - Rare disasters

KW - Return predictability

KW - Text-based analysis

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News implied volatility and disaster concerns

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Keywords

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